What the Bitcoin Fork Means for Your Taxes
So Bitcoin forked into two separate cryptocurrencies - Bitcoin and Bitcoin Cash.
Bitcoin Cash went from nonexistent to a market capitalization of 8.2 billion overnight. Yet the market capitalization of Bitcoin stayed about the same.
This creates a new and interesting tax problem for US investors.
Is the fork itself a taxable event? Probably not. There was no change of ownership.
But for the investors who now find themselves with "free" Bitcoin Cash, the question becomes how to allocate the basis, or cost, of Bitcoin versus Bitcoin Cash.
When you sell or exchange cryptocurrency, you pay tax on the gain. To calculate gain you need a cost.
There's no clear guidance on how to divide the cost between Bitcoin and Bitcoin Cash, but we can make good faith effort.
The IRS views Bitcoin similar to a stock. So segregating the relative costs would be done similar to a stock spinoff.
A stock spinoff is the creation of a new company through sale or distribution. An investor assigns cost to each company based on the relative market vale on the distribution date.
After the split, Bitcoin was worth about 5.3 as much as Bitcoin Cash. So for a $100 investment, the cost of the Bitcoin Cash would be roughly $19, and the cost of the Bitcoin would be roughly $81.
What if you had Bitcoin in a wallet like Coinbase and didn't receive the Bitcoin Cash? As you never had "constructive receipt" of the Bitcoin Cash, your tax situation, and the basis on the Bitcoin, would stay the same.
Let me know your thoughts in the comments.